2010 (4) TMI 206 - HC - Income Tax

Reopening u/s 147 unjustified; notice u/s 148 set aside; Rule 8 cannot block 40% plantation loss setoff; rectification u/s 154.

Hindustan Unilever Limited Versus 1. Deputy Commissioner of Income tax 1 (1), 2. Union of India

HC set aside notice u/s 148 and held reopening unjustified. AO's view that Rule 8 prevents setting off 40% plantation losses against normal business ... Reopening of an completed assessment - income escaping assessment - reason to belief - claimed exemption u/s.54EC - capital gains in the longterm specified asset​​​​​​​ - assessment was reopened on four grounds - (i) adjustment of loss sustained by the Plantation division - loss incurred by the eligible unit u/s 10B - Held that:- Assessing Officer, while issuing a notice for reopening the assessment observed that the provisions of Rule 8 are applicable “only in the case of income” and the claim of the assessee to set off 40 per cent. of losses against normal business profits could not be allowed. - view of AO is not correct and assessee is eligible to adjust loss - (ii) Computational Error in the Assessment Order - Held that:- In this case the Revenue has an efficacious remedy open to it in the form of a rectification u/s 154 for correcting the computational error and that consequently recourse to the provisions of Section 147 was not warranted. - (iii) The investment under Section 54EC - For the purposes of the provisions of Section 54EC, the date of the investment by the assessee must be regarded as the date on which payment was made and received by the National Housing Bank (Not the date on which certificate was issued). This was within a period of six months from the date of the transfer of the asset. Consequently, the provisions of Section 54EC were complied with by the assessee. There is absolutely no basis in the ground for reopening the assessment. – (iv) - The loss incurred by the eligible unit under Section 10B: - All the four units of the assessee were eligible under Section 10B. Three units had returned a profit during the course of the assessment year, while the Crab Stick unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. In these circumstances, the basis on which the assessment is sought to be reopened is contrary to the plain language of Section 10B. – Notice issued u/s 148 set aside Issues Involved:1. Loss sustained by the Plantation division.2. Computational error in the assessment order.3. Investment under Section 54EC.4. Loss incurred by the eligible unit under Section 10B.Detailed Analysis:(i) Loss Sustained by the Plantation Division:The petitioner reported a loss of Rs.10.84 crores from its Plantation division, which was deducted from its business income. Rule 8 of the Income Tax Rules, 1962, stipulates that income from the sale of tea grown and manufactured by the seller in India is to be computed as if it were income derived from business, with 40% of such income deemed taxable. The Revenue contended that the assessee's claim to set off 40% of the losses against normal business profits was not allowable, thus reopening the assessment.The Court held that Rule 8 creates a legal fiction requiring the computation of income derived from the sale of tea 'as if it were income derived from business,' which includes considering the expenditure incurred. The assessee was entitled to adjust the loss arising from its business activity under Rule 8. The Court emphasized that income includes losses, and the Assessing Officer's inference that the loss of Rs.10.84 crores was entirely to be disallowed was contrary to the law. The reopening of the assessment on this ground was not justified.(ii) Computational Error in the Assessment Order:The assessee's business income was disclosed as Rs.1815.59 crores after adjusting the loss from the Plantation division. The Assessing Officer, however, made a computational error by deducting the loss of Rs.10.84 crores again in the assessment order.The Court noted that the computational error could be rectified under Section 154 of the Income Tax Act, which allows for the amendment of any order to rectify a mistake apparent from the record. The Court held that the Revenue should have used the rectification power under Section 154 instead of reopening the entire assessment under Section 147, which would cause serious prejudice to the assessee. The reopening of the assessment on this ground was deemed inappropriate.(iii) Investment under Section 54EC:The assessee invested Rs.3.07 crores in National Housing Bank Capital Gains Bonds within six months of transferring an immovable asset. The Revenue contended that the investment was made beyond the stipulated period, thus reopening the assessment.The Court found that the investment was made on 19th March 2004, within the six-month period from the date of transfer (29th September 2003). The date of allotment of the bonds (31st March 2004) was irrelevant for the purposes of Section 54EC. The Court held that the assessee complied with the provisions of Section 54EC, and there was no basis for reopening the assessment on this ground.(iv) Loss Incurred by the Eligible Unit under Section 10B:The assessee claimed a deduction under Section 10B for its 100% Export Oriented Undertakings, including a unit that incurred a loss. The Revenue argued that since the income of the unit was exempt, the loss could not be set off against normal business income, thus reopening the assessment.The Court clarified that Section 10B provides for a deduction, not an exemption. The loss from the eligible unit could be set off against normal business income. The Assessing Officer's basis for reopening the assessment was incorrect, as it misinterpreted Section 10B. The reopening of the assessment on this ground was not justified.Conclusion:The Court concluded that the Assessing Officer could not have reasonably formed a belief that income chargeable to tax had escaped assessment. The notice dated 31st March 2008 issued under Section 148 of the Income Tax Act, 1961, was set aside. The petition was allowed, and the rule was made absolute with no order as to costs.